This is the full (unedited) piece, written by George Dunn, TFA Chief Executive, for The Scottish Tenant Farmers Association News, Summer 2019 edition, published the 12 June 2019

In April this year, the Department for the Environment Food and Rural Affairs and Welsh Government launched separate but linked consultations on agricultural tenancy reform. Apart from some discussion concerning how to ensure best practice in areas such as planning for retirement, providing for longer term tenancies and less restrictive agreements, the consultations are entirely focused on legislative change to the Agricultural Holdings Act 1986 (1986 Act) and the Agricultural Tenancies Act 1995 (1995 Act). In fact, the consultations focus most of their attention on the former rather than the latter. However, it could be argued that it is the 1995 Act, which ushered in Farm Business Tenancies, which needs the greatest degree of scrutiny.

The 1995 Act marked the most comprehensive deregulation of the agricultural let sector ever. According to the free-market ethos dominant at the time, it was believed that almost complete freedom of contract was the best way to ensure the most efficient outcomes for UK agriculture. Three main objectives were set for the new legislation as follows:

To encourage more letting of agricultural land;

To increase opportunities for new entrants;

To promote economic efficiency in agricultural land use.

As to the first of these objectives, the previous pattern of decline in let agricultural land was replaced with net gains up to 2003. However, since that time the sector has seen 15 years of fragile stasis. Much of the early success can be put down to the codification of informal agreements struck between parties before 1995, which had attempted to avoid security of tenure.

On new entrants, the Central Association of Agricultural Valuers (CAAV) reports in its 2017 survey of agricultural land occupation, that less than 8% of all lettings and only 18% of lettings where there is a change in occupier, are going to new entrants. It is difficult to judge whether these figures can be viewed as success, but there is evidence of considerable, unfulfilled demand for opportunities from new entrants with many reporting that they feel excluded because of their inability to compete with established businesses.

Turning to the third objective, the TFA argues that FBTs have failed to improve efficiency within UK agriculture. Farming is a long-term endeavour requiring significant capital investment, patience, good soil management and the ability to balance profitable years against the bad. None of this is assisted by the short lengths of term offered on today’s FBTs. Over the nearly 25 years of the legislation the length of term on an FBT has, give or take a few months either way, averaged just under four years. Excluding lettings of less than a year, the average tenancy length is less than 5 years. Worryingly, fully equipped holdings, which would be expected to be let for much longer terms, have an average duration of less than 10 years. As we approach half of all land let being under FBT’s it is worrying, to say the least, that 85% of new farm tenancies are let for terms of 5 years or under.

The short-term nature of agricultural tenancies is holding back progression, investment, sustainable land use and productivity on farms. With much higher demand for farmland than supply, landlords can offer short-terms, for high rents at very little risk whilst at the same time pocketing generous and unconstrained tax benefits which the TFA argues must be addressed.

Everyone agrees that long-term relationships are the best way to achieve positive outcomes for landlords and tenants and yet the market is failing to deliver efficient or sustainable outcomes. The tenanted sector cannot begin to consider issues of resilience and sustainability in the post Brexit environment (whenever that might be) with such short lengths of term. It is now urgent that the Government steps in to address this major market failure.

The TFA argues that when landlords are reluctant to use the full flexibility of the statute but have gained considerably from the new legislation and its tax changes, this represents a market failure. Frustrating then that with the Government launching what is indeed a major consultation on reforms to agricultural tenancy legislation does not include an explicit reference to taxation.

For many years, the TFA has been a vocal advocate for change in the taxation environment within which landlords make decisions on letting land. In 2015, coinciding with the 20th anniversary of the introduction of FBT’s, the TFA launched its FBT10+ campaign both to highlight the issues and argue for fiscal and legislative change. It is on the fiscal side that the TFA believes we are likely to see the biggest impact for a relatively small number of changes which are outlined below:

Restricting the generous, 100% Agricultural Property Relief from Inheritance Tax (currently available to all landlords regardless of the length of time for which they are prepared to let land) only to those prepared to let for 10 years or more, or on new tenancies (eg successions) with security of tenure under the Agricultural Holdings Act 1986.

This would be at least fiscally neutral for the Government should all landlords decide to remain in the letting market and let for 10 years or more and fiscally beneficial if a number of landlords continue to let for shorter terms than 10 years. This measure will not increase the number of lettings but will improve the quality of lettings currently offered within the marketplace. However, in order not to disturb the availability of land for high value crops which need to be part of a rotational system, there should be an exemption for any land let for up to 2 years where the land was not let at any time in the 12 months immediately prior to the letting.

Clamping down on those land owners who, through schemes promoted by agents and accountants, are using share farming, contract farming, share partnerships and grazing licences as thin veneers of trading activity and as vehicles for aggressive tax avoidance since in practice they take no risk in the business, have little, if any, entrepreneurial input and lack any management control.

This would be at least fiscally neutral for the Government should all effected landowners decide to remain in farming either by using the arrangements mentioned in a proper manner, farming fully in hand or letting their land on bona fide tenancy agreements. The measure could be fiscally beneficial if, as a result of the enhanced checking, landowners were found to be in a position of having to pay more tax.

Offering landlords prepared to let land for 10 years or more the ability to declare their income as if it was trading income for taxation purposes.

Whilst this could be fiscally negative for the Government it is more likely to be fiscally neutral as many more landowners using platforms including share farming, contract farming, share partnerships and grazing licences to avoid tax, will find letting land for a longer period to be more attractive.

Reforming Stamp Duty Land Tax to end the discrimination against longer tenancies.

This is likely to be at least fiscally neutral for the Government as vanishingly few longer tenancies are being offered in the marketplace currently.

Requiring landlords over whom the Government has influence (for example The Crown Estate) to default to using 10 year plus farm tenancies.

As this is not a tax issue it will not have a direct fiscal impact. However, it will send an important signal to such landlords about the importance of letting sustainably and not only concentrating on enhancing the book value of their estates.

The TFA is convinced that unless or until we have reform of the taxation framework within which landlords make the decisions about letting the land, we will perpetuate an unsustainable position of short-term lettings into the future which will spell disaster for enhancing productivity, raising resilience and maintaining or improving the environmental performance of the agricultural industry.